Evading Trade Sanctions in North Korea
Research being conducted at two august academic institutions in the Boston area is shedding light on how North Korean companies are evanding United States sanctions.
Not if—but how.
It’s almost a foregone conclusion that the object of sanctions will attempt to evade them in a cat-and-mouse game between the sanctions imposer and the intended targets.
The data collected in the course of the research at the Massachusetts Institute of Technology and Harvard University was gathered by interviewing former employees of North Korean state trading companies who have since defected. Interim results of the research were presented earlier this month at the Brookings Institution in Washington.
In the case of North Korea, sanctions evasion involves ingeneous schemes that primarily involve sympathetic parties in China. North Korean operatives are embedded in Chinese companies to learn markets and take advantage of Chinese manufacturing capabilities and logistics infrastructures. The timing of payments are made in such away as to evade detection. Goods are transited through the port of Hong Kong and shady monetary maneuvers are centered in Singapore.
As with any international policy, unintended consequences emerge, and, in the case of North Korea sanctions, not all of them are necessarily bad.
Sanctions regimes can have multiple pruposes, noted Jim Walsh, a research associate at the Center for International Studies at MIT, and a principal researcher on the project. “This study is narrowly focused,” he said. “It is focused solely on sanctions for the purpose of denying weapons technology and materials to North Korea. We do not go into these other areas of coercion or regime change.”
Innovation is the key to the success of North Korean state trading companies’ respose to sanction, according to John Park, a faculty affiliate at Harvard, and Walsh’s partner in the research. “The story is one of normalcy,” he said.
The North Korean traders partner up with the most capable Chinese middlemen. And they attract the best and the brightest by paying top dollar for their services to compensate them for the risks they are undertaking.
Often, the North Korean scheme involves setting up private companies within China to conduct business. “With this,” Park added, “we are seeing the outsourcing of logistics by the private Chinese company to other Chinese companies, financing other elements of doing a transaction on behalf of the North Korean client. It’s much more sophisticated than in the past.”
Structuring payments for transactions is done to reduce the risk of detection. “You see the bulk payments of a particular transaction by the North Korean partner at the end of a transaction,” said Park. “Cash on delivery at the end lowers the risk of detection.”
In the case of moving goods, Hong Kong is the logical choice because the huge volume of traffic that moves through that port allows the North Koreans to hide in plain sight.
The cash is funelled through Singapore, which is replacing Switzerland as the money management capital of the world. “A lot of it has to do with U.S. governmental efforts to crack down on numbered accounts that were a big part of illicit finance,” said Park. “A lot of that activity has migrated to Singapore.”
There is also some good news to report on the North Korea sanctions front. One is that there are only a small number of North Korean companies individuals involved in this type of sanctions-evading activity.
Another is that trade compliance has reached an elevated status among some Chinese companies. “These are the firms that want to do business in New York, they want to do business in Geneva and Zurich,” said Walsh. “Imposing sanctions created a market for compliance. CEOs are getting on the phone and saying we need a compliance department. We need to hire compliance officers. There is a whole cottage industry…that has built up in China on the part of firms that don’t want to get their hands dirty inadvertently, and therefore forfeit the opportunities for doing business internationally.”
Another potentially positive outcome of sanctions evasion is that there is a growing number of North Koreans who are becoming familiar with international markets. “Let’s say there is a transition in North Korea at some point,” said Walsh. “It would be great to have some technocrats who really knew how markets worked.”
The downside, of course, is that they are now using their skills to help North Korean weapons programs. And, of course, sanctions evasions promote a culture of corruption.
In the meantime, the cat-and-mouse game will continue. “Sanctions are an iterative game,” said Walsh. The enemy gets a vote. They are going to try to get around whatever you come up with. We have a tendency to repeat the same thing over and over again, whereas they are innovating in the face of what we do and getting around it.
“If we are going to have some success,” Walsh concluded, “we need to innovate as well and to think about it differently than we do today.”